Not exactly the most treasured memory or great family picture, but maybe useful information in this story on the New York Times. Here you go:
MANY business owners are so consumed with day-to-day operations that they dont think about estate planning. But the federal estate tax, with a top rate of 45 percent, can have a big effect on the business you leave behind, and planning while you are hearty is the best way to manage that.
Among the arrangements to make are leaving a source of cash to cover the tax bill and, as much as you can afford it, giving assets to younger family members while you are alive. These lifetime gifts, as they are called, have a dual benefit: they reduce the size of your taxable estate, and, if the assets increase in value after you have passed them on, the appreciation is tax free.
When Congress was considering a permanent repeal of the tax, which currently applies to estates worth more than $2 million, small-business owners lost interest in this kind of planning, said Dennis I. Belcher, a lawyer with McGuireWoods in Richmond, Va. But since the repeal efforts failed last year, more clients have asked about lifetime gifts, Mr. Belcher said.
Which methods work best depend on your liquidity needs, tolerance for complexity and whether you act before or after the business has increased in value. Here are some considerations:
Reducing business holdings could leave you strapped for cash. The simplest alternative is to buy life insurance that would cover the tax bill, Mr. Belcher said. Start by setting up an irrevocable life insurance trust, which can buy the policy and, when you die, hold the proceeds for whomever you have named as beneficiary. Without a trust, the policy would be considered part of your estate and the proceeds could be taxed.
Next, you need to funnel money into the trust so it can pay the premiums. There is no gift tax on your contributions as long as you stay within the annual limit of $12,000 per recipient, with no limit on the number of recipients. Spouses can pool their gifts to jointly give $24,000 to any person tax free, and each trust beneficiary counts as one person.
You dont want to give up control. First, divide the business into voting and nonvoting shares, even if you must recapitalize the company, said Richard L. Dees, a lawyer with McDermott Will & Emery in Chicago. Ideally, voting stock should make up no more than 10 percent of the total company shares, he said. After that, you can give away partial interests in the business. You can make these gifts to family members directly, but it is better to use an irrevocable trust, which protects the assets from creditors, said Steven B. Gorin, a lawyer with Thompson Coburn in St. Louis.
Since gift recipients lack control, and the shares are considered unmarketable, you can value both the gift and the interest you retain at a discount of 35 to 45 percent, lawyers said. The discount on what you give away enables you to pack more into your annual limit, or into the $1 million overall limit on what you can exclude over a lifetime. (A 45 percent levy kicks in on anything over $1 million.)
Giving away too much in business assets could incur the gift tax. In that case dont give them away sell them in exchange for a promissory note with interest, said John D. Dadakis, a lawyer with Schiff Hardin in New York. With this strategy, you can also apply discounts and avoid tax on future appreciation. Here, too, it is preferable to use a trust, rather than dealing with family members directly.
A liquidity event, like a sale or initial public offering, is on the horizon. You can transfer the appreciation at little or no gift-tax cost with a grantor retained annuity trust. Here you put company shares into a short-term irrevocable trust and retain the right to receive an annual income stream equal to the value of what you contribute plus interest at a rate set each month by the Internal Revenue Service (the Section 7520 rate). If you survive the trust term a condition for this tool to work any appreciation in the trust when the annual payments end passes to your family.
On the other hand, if the appreciation never occurs, the business owner is no worse off, said Charles A. Redd, a lawyer with Sonnenschein Nath & Rosenthal in St. Louis. In this case, the trust would satisfy its payout obligations by returning some of the stock to the owner.
As you near retirement, cash flow can be a concern. Consider a charitable cash bailout, said David T. Leibell, a lawyer with Wiggin and Dana in Stamford, Conn. Here, the owner, who has already transferred some shares to children, puts others into a charitable remainder trust, and the company buys them back for cash at fair market value. The trust uses the cash to supply an income stream to the owner, with the rest going to charity after the owner dies. Meanwhile, the company retires the shares it has bought back, increasing the value of what the children retain. This transaction avoids income tax, gift tax and estate tax, Mr. Leibell said.
Whether you choose just one of these strategies or use them in combination, it is best to start with the least complicated approach that will achieve your goals. Lawyers fees for these transactions can range from less than $10,000 to many multiples of that sum, depending on the details. And any time you give away shares of a business, you must get an appraisal, which can easily cost $5,000 or more. You will want to be sure that what you spend to use various estate-planning tools is less than your heirs would pay the tax man.
